More State Incentives for Oil and Gas Companies

As oil and gas production continues to move downhill without new discoveries, the government has introduced a series of fiscal incentives designed to encourage investment in exploration.

The government has provided an exemption for oil and gas companies from the obligation to pay the value-added tax of imported goods as well as property tax, SKMigas’s Bambang Yuwono said.

That incentive would add to the exemption of import duty and relaxation over income tax obligation, added Bambang, who is head of the risk management treasury and taxation at the regulator.

Under the new regulation, formulated by the Finance Ministry, oil and gas firms will only have to pay property tax of around Rp 28 per square meter during exploration activities, he said.

Though he could not recall the rate under the previous regulation, Bambang was adamant that the new tax was significantly lower.

“Before, oil and gas companies had to pay around $10-$20 million a year for property tax, now it would be less than $1 million a year,” he said, while reiterating that such incentives are only valid during the exploration stage.

Also under the new regulation, the property tax imposed will only be confined to the area where the exploration is actually performed.

While companies can secure rights to search for oil in areas measuring up to hundreds of kilometers, the actual exploration only takes up a small amount of space.

Under the new value-added tax for the oil and gas industry, companies would no longer have to pay taxes for equipment and machinery needed for exploration.

Such regulations are important as many oil and gas firms rent equipment. Only the largest firms have the ability to purchase the expensive machinery.

“Before, the value-added tax was charged on the value of the equipment, not the value of the rent,” Bambang said.

He added that the amount of tax charged for a single oil rig was higher than the cost of developing the well under the previous regulation.

“We succeed [in eliminating the taxes]. There are no more.”

Edy Hermantoro, the newly-appointed director general for oil and gas at SKMigas, said that the exemption from income tax is meant for companies with giant projects on the pipeline.

“Like what the Pertamina-led consortium requested for the development of East Natuna,” he added.

The development of East Natuna, located in the South China Sea, is estimated to cost more than $20 billion.

State-owned Pertamina partnered with Exxon Mobil, Total E&P Indonesia and PTT Exploration and Production in developing the block, said to hold 46 trillion cubic feet in natural gas reserves.

Edy said that providing attractive fiscal incentives was only one of several government efforts to attract more investment in exploration.

He added that the government aims to provide better quality seismic information on the country’s oil and gas potential.

The government intends to create a petroleum fund in which some state revenue from the industry would be pooled and used for seismic surveys.

Rudi Rubiandini, chief of SKMigas, said that the country sees few results from exploration activities and that out of 80 wells drilled in the past three years, 29 are dry.

Rudi said that the amount of new findings should be equal with the output. “In 2012 [the replenishment rate] was 52 percent … so it’s only natural that [production] is declining,” he added.

The Indonesian Petroleum Association welcomed the fiscal incentives, according to its chairman, Lukman Mahfoedz. Lukman added that the government must also improve the process of land acquisition.

“These would be attractive incentives for exploration,” said Lukman, who serves as president director of Medco Energi International.

The problem with land acquisition, according to Lukman, is not caused by the Energy and Mineral Resources Ministry or SKMigas, but from other government institutions. “It needs a breakthrough,” he said.

According to resource giant BP, Indonesia’s oil reserves have fallen faster than any other Asian country.

A former OPEC member, it had four billion barrels of proven oil reserves in 2011, down from 5.9 billion barrels in 1991.

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